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Commercial Law Contract Law

Swiss Commercial Contracts: Contracts for Supply

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Swiss Commercial Contracts: Contracts for Supply

Supply-side contracts are often structured as a purchase contract, contract for work, service contract, or a mix thereof, depending on the type of materials, goods, or services procured. A purchase contract is distinguished by exchanging an object of purchase (which may also include groups of assets, rights, and claims of various sorts, natural forces like electricity and water, or economic advantages such as goodwill and knowhow, to mention a few) for money.

Meanwhile, both labor contracts and service contracts are distinguished by a commitment to executing a certain work or service. The primary difference between these two types of contracts is the verifiability of success. In a work contract, the service provider agrees to execute labor to deliver a (tangible or intangible) work outcome that meets the agreed-upon (or implied) specifications. As a result, the service provider owes an objectively provable effect or result. Contracts in the construction, manufacturing, and maintenance industries are classic examples.

In contrast, the outcome of the service provider’s efforts cannot often be tested against objective criteria under a service contract. As a result, the service provider is not required to accomplish the anticipated result to fulfill the contract but is just required to perform the agreed-upon services diligently. Consultancy and management services are common services delivered under a service agreement.

Considerations for Drafting

The CO includes a special set of regulations for each of the above-mentioned categories of contract, which complement and, in the event of a disagreement, precede the requirements of the general part of the CO. However, because the vast majority of the CO’s provisions are non-mandatory, parties frequently choose to replace a larger portion of these provisions with their unique contractual agreement. In the case of contracts that mix different services and deliverables and do not clearly match one of the above-mentioned contracts, it is especially important to spell out the parties’ obligations and available remedies in more detail.

While the specification of deliverables and services and the accompanying remuneration are the focal point of any supply agreement, the following issues are frequently a source of contention. They should be addressed, particularly in mixed-type contracts:

Subcontractor involvement and liability: By default, the service provider under a work contract is free to designate subcontractors but remains entirely liable for the end outcome. In contrast, the service provider is more constrained in appointing subcontractors by default under a service agreement but has a limited obligation in circumstances where such restrictions do not apply.

Acceptance procedure, warranties, and remedies: The CO specifies a precise (albeit not identical) default acceptance procedure for purchase contracts and work contracts, as well as remedies in the event of non-conformity of goods or deliverables. These are regularly updated since they do not meet the parties’ needs, especially in the case of increasingly complicated projects.

Termination: By default, the CO provides several termination choices to the customer under a work contract, frequently amended or excluded. For service contracts, the CO states that either party may end the contract at any time (subject to liability for damages in case of untimely termination). The Federal Supreme Court has ruled on various occasions that this termination power is mandatory and that the parties are thus not bound by the contract duration or notice periods.

Corporate Law

Overview of Shareholders’ Rights and Obligations in Switzerland in 2022

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Overview of Shareholders’ Rights and Obligations in Switzerland in 2022

General Information

Equity investors gather and exercise their rights in the corporation’s general meetings; hence, ordinary or extraordinary general meetings are a key component of the CG in Switzerland. Attempts to rank the degrees of shareholder protection are usually somewhat arbitrary. Switzerland ranks approximately in the center in this respect compared to other countries. The Swiss norm for the CG, on the other hand, is interpreted differently outside of Switzerland.

For example, the Organization for Economic Cooperation and Development (OECD) classified Switzerland as very weak on CG matters in a 1998 research. The World Economic Forum (WEF) has placed Switzerland 41st out of 133 countries to protect minority shareholders’ rights in its Global Competitiveness Report 2009-2010126.

Fiduciary Duties of Controlling Shareholders

According to article 680 para 1 CO, shareholders have one and only one obligation under Swiss corporation law, namely to contribute the amount fixed at the time of issue for a share (Liberierungspflicht); SESTA introduced two additional obligations for equity investors in listed companies at the end of the 1990s (article 20 SESTA: disclosure obligation; article 32 SESTA: mandatory takeover offer to the other shareholders).

In Switzerland, fiduciary obligations of shareholders in general, and controlling shareholders in particular, are a rare matter of legal debate. Only a few writers believe that shareholders have any fiduciary obligations at all, with the vast majority of commentaries explicitly rejecting such an idea for (controlling and other) shareholders under Swiss law.

Nonetheless, the majority and other controlling owners must comply with the law. According to article 717 CO, the board must ensure that these investors follow the laws – even if the board members may be dismissed later by controlling shareholders’ votes in the general meeting (article 705 CO).

Tunneling by controlling shareholders, for example, is unlawful under Swiss law and has implications under both corporate laws and tax law. According to article 678 CO, shareholders who have received unjustifiably and in bad faith, for example, shares of profits and interests as well as other company performances, are required to return them to the corporation (para 1/para 2); the damaged corporation and any of its shareholders may file an action (para 3) for which the current statute of limitations is five years.

Shareholders’ Rights – in Particular, Information Rights

It is practically difficult to completely define the shareholders’ rights under Swiss law in the restricted space of this Country Report.

In general, an equity investor in a firm obtains two types of entitlements: financial rights (such as dividends and pre-emptive rights) and non-financial rights (e.g., rights to call a general meeting and to participate at a general meeting, rights to speak and to vote at a general meeting, rights to file different actions against the corporation or the board members, respectively, and finally, a variety of information rights).

The many information rights (articles 696 et seq. CO) are critical for protecting (minority) shareholders in Switzerland. Under Swiss law, four information rights are paramount: article 696 CO, article 697 CO, articles 697a et seq., and article 697h CO:

– Article 696 CO: no later than 20 days before the ordinary general meeting of shareholders, the business report and, if any, the auditors’ report shall be made available for inspection at the corporation’s domicile (article 696 para 1 CO); a shareholder may request these documents in copy after approval by the general meeting (article 696 para 3 CO). In truth, most Swiss companies are significantly more forthcoming in their dealings with their investors.

– Article 697 CO: At the general meeting, each shareholder has the right to obtain information from the board on the “affairs of the business” (article 697 para 1 CO). Furthermore, if the general meeting or the board of directors has provided the necessary authorization, every shareholder has the right to see the company’s records and files (article 697 para 3 CO).

– Article 697a et seq. CO: In the early 1990s, the Swiss Parliament enacted the special audit (articles 697a et seq. CO: Sonderprüfung), which foreign models influenced (e.g., Germany). The special audit attempts to improve shareholders’ knowledge level to launch, for example, a liability action against board members.

Only facts, and therefore not legal issues, may be subject to a special audit, on which the general meeting must vote in any event; the facts must be required for exercising shareholders’ rights (article 697a para 1 CO). If the general meeting does not approve the special audit, only shareholders who fulfill specified share capital criteria may go to court at all (article 697b para 1 CO).

Following then, there is a very convoluted back-and-forth between one shareholder and the company (articles 697c et seq. CO).

Finally, at the next general meeting, the special auditor’s report will be delivered to the judge (article 697e CO) and, finally, to all shareholders (article 697f CO).

Switzerland does not have a group corporate law. Nonetheless, certain norms and precedents are vital for organizations. For example, the parent company’s shareholders have the right to see the books and files of other group companies under certain situations, and the special disclosure duty under article 697h CO also applies to the consolidated financial statements.

Commercial Law Contract Law

General Swiss Contract Law in 2022: The Swiss Code of Obligations (CO)

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General Swiss Contract Law in 2022: The Swiss Code of Obligations (CO)

For commercial contracts governed by substantive Swiss law, the CO is the primary source of law. The CO includes broad laws on contract law and regulations on specific forms of contracts, such as purchase contracts, leases, and contracts for work or services. These rules also apply (by analogy) to contract kinds not expressly covered by the CO (so-called innominate contracts).

Commercial Contract Formation and Validity

The contractual parties’ exchange of an offer and corresponding acceptance is the primary requirement for contract formation. The contract’s essential terms (essentialia negotii) must be included in both the offer and the acceptance. Contracts can generally be concluded without any formal criteria. Assignments, suretyships (guarantees), and property sale contracts are the principal exceptions to this norm. In practice, the parties frequently include explicit conditions in their contractual relationship to establish the content of their agreement.

Additionally, the fundamental notion of contractual freedom underpins Swiss contract law. It offers the parties the ability, within the bounds of mandatory legislation, to conclude or not conclude a contract, select their contractual partner, determine the contract’s content, and terminate or change a contract. Swiss contract law comprises few mandatory elements; further restrictions may be imposed by laws other than contract law, such as competition law, unfair competition law, criminal law, or tax law. A contract (or any part of it) is void if its conditions are impractical, illegal, or immoral.

Moreover, where there is a clear disparity between performance and counter-performance under a contract (due to one party’s exploitation, inexperience, or thoughtlessness), the injured party may declare within one year that it will not honor the contract and demand restitution for any performance already made. Furthermore, a party who enters into a contract due to (fundamental) error, fraud, or coercion may normally declare to the other party within one year that it does not intend to honor the contract; nonetheless, such party may become liable for damages.

Adoption and Use of Standard Terms

In B2B relationships, the rules governing general terms and conditions are nearly identical to those governing individual contracts, particularly the concept of offer and acceptance. According to the Federal Supreme Court, judicial authority over standard terms in business-to-business partnerships is limited to their incorporation. It does not include substantive control over their content (except for the application of mandatory law). Nonetheless, the inclusion of standard terms is a tool for controlling the substance of such terms, particularly under the general rule that odd standard phrases are not incorporated into the contract. Furthermore, if the structure of a specific provision allows for two distinct interpretations, the drafting party must bear the risk of ambiguity.

Contract Breach and Remedies

The type of breach determines the set of remedies accessible to the aggrieved party under Swiss law: impossibility, defective performance (including delivery of non-conforming products), or delay. If execution of an obligation is impossible for objective reasons before or at contract completion, the contract is void. Under the idea of culpa in contrahendo, the party who breaches the contract may be accountable for damages. In contrast, if the execution of an obligation becomes impossible after the contract’s conclusion due to the fault of one of the parties, the contract remains legal. In general, the offended party may seek restitution.

In the event of a party’s failure to perform properly, the other party may, as a general rule, seek either particular performance or damages. In practice, the common remedy is monetary damages (positive interest). In the event of purchase contracts and labor contracts, further remedies for non-conformity of the goods (or works) apply.

If a party fails to perform on time, it must pay damages for the delay. Subject to certain conditions, the aggrieved party may also (i) waive performance and seek compensation for damages incurred as a result of non-performance (positive interest), or (ii) withdraw from the contract and seek compensation for damages incurred as a result of non-performance (negative interest). Unless the parties agree differently, a debtor in default on paying a financial debt must pay default interest of at least 5% per annum.

Under Swiss law, both liquidated damages (meant to compensate for expected damage) and contractual penalties (meant to punish) are regularly utilized. However, at his discretion, a court may lower the number of liquidated damages or a contractual penalty if he believes it is excessive.

Liability and Liability Limitation

In general, the obligor is accountable for any fault attributable to it. The obligor carries the burden of establishing that it was not at fault for the contract’s incorrect or non-performance.

Swiss law allows for the limitation (and exclusion) of liability, such as for specific types of damages or financial limits. Any arrangement reached in advance that purports to limit liability for any unlawful purpose or gross negligence, on the other hand, is null and void. Furthermore, suppose the limitation of responsibility occurs in connection with state-licensed commercial activity (e.g., banks). In that case, the advance limitation of liability for mild negligence may be void as well, at the discretion of the court. Furthermore, under specified sections of the CO (e.g., governing purchase contracts or contracts for work) or specific laws such as the Product Liability Act, limitation of liability is not authorized for death or personal harm.

Termination and Term

In general, a contract can be entered into for a set period or unlimited time. A fixed-term contract expires with no warning. A contract with an indefinite term, on the other hand, maybe terminated by either party by giving notice of termination by the termination provisions agreed between the parties or, if a contract lacks any termination provisions or if mandatory termination provisions apply (such as lease or services), according to the statutory provisions of the CO.

In addition, in the case of continuous obligations, either party may cancel a Contract with immediate effect for valid reasons at any moment. Valid reasons are circumstances that make the contract’s continuation unacceptable to the terminating party. Such termination must be declared as soon as possible.

Banking and Finance Law

Structured Products under FinSA

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Structured Products under FinSA

The Swiss regulatory environment for structured products has changed considerably as a result of the FinSA and FinSO’s implementation. Certain amendments to structured product regulations are made directly, but the great majority are made as a result of their inclusion in the FinSA’s broader framework. This article discusses the new structured product regulations, as well as a few particular issues.

This part will serve as a primer on the subject.

When the Financial Services Act (FinSA) and the Financial Services Ordinance took effect in January 2020, structured product regulation underwent significant changes. (FinSO). Until 2019, structured products were governed under Article 5 of the Collective Investment Schemes Act (CISA), and the previous Collective Investment Schemes Ordinance articles 3(7) and 4. (CISO). Since these legislative restrictions do not fulfill the criteria of a “collective investment plan,” they cannot be enforced to the fullest degree feasible.

Starting with 2020, Articles 70 and 96 of the FinSA and FinSO, which govern structured commodities, have been repositioned. As a result, relevant parts of CISA and CISO have been eliminated. Because the FinSA and FinSO have made significant modifications to structured product regulation, this is not a simple transfer of previous regulations. Certain modifications are immediately apparent because they are reflected in the applicable regulations. The inclusion of structured products in the FinSA’s broad regulatory framework has a number of less obvious but nevertheless significant repercussions.

Article 94(3)(a) of the Financial Market Infrastructure Act (FMIA), which exempts structured products from derivatives trading limitations, has also been preserved (i.e., clearing, reporting, risk mitigation, etc.).

Structured products have been added to the list of financial instruments permitted for investment purposes according to FinSA article 3(a) (4). As a result, the same laws that govern the sale and distribution of financial instruments, as well as financial services, must apply. The FinSA’s Articles 70 and 96 go into further detail on structured products in addition to the FinSA’s overarching framework. In any event, the previous “ad hoc” system of commodity regulation has been phased down.

Under the FinSA, structured goods are not defined in the same way as they were under the CISA. According to Article 3(a) of the FinSA, “financial instruments” include “capital-protected commodities, capped return products, and certificates” (4). Article 5 of CISA has a similar group of examples. Along with “exchange-traded goods,” this regulation covers all other types of instruments, such as trackers, certificates of reverse convertibles, and warrants.

If there is any uncertainty about whether a product qualifies as a structured product under FinSA’s definition, one of the following options is available:

Verify that the category in which you are interested in one that is recognized by the Swiss Structured Products Association (see FinSO Annex 3, sections 1.2.2 and 3.0).

Consider the following ESMA definition, which we believe is equivalent to Swiss practice: “To give economic exposure to reference assets such as benchmarks or portfolios, an embedded derivative (or derivatives) may be included into a note, fund, or deposit. The term “structured retail products” refers to these financial instruments. They give investors with predetermined pay-offs based on the performance of reference assets, indexes, or other economic indicators.” 2nd Instead of structured products under article 3(a)(4) of FinSA, structured funds and structured deposits are classified as units in collective investment schemes and variable return deposits under article 3(a)(3) and 6 FinSA, respectively. This is a significant difference.

A prospectus is necessary.

Due to the fact that structured products are now deemed financial instruments under FinSA article 3(a), they must be accompanied by a prospectus if they jointly offer any of the following risks:

Additionally, it is a security, as defined in FinSA article 3(b) for instruments issued for mass trading in financial markets, as defined in FinSA article 3(a) for instruments issued for mass trading in financial markets, as defined in FinSA article 3(a) for instruments issued for mass trading in financial markets, as defined in FinSA article 3(a) for instruments issued for mass trading in financial markets, as defined in FinSA article 3(a) for instruments issued for mass trading in financial markets, as defined in FinSA (b).

The product may be offered openly or via a trading venue, as defined in Article 35(1) of the Financial Services Act.

The prospectus should be written in line with FinSO Annex 3 if all of these requirements are satisfied. (“Minimum prospectus content: Derivatives scheme”). If the requirements set out in article 51(2) FinSA are satisfied, structured product prospectuses may be published prior to submission to the reviewing authority under item 2 of FinSO Annex 7 prospectuses.

This is a private client-only service.

Previously, structured product distributors were required to provide non-qualified investors with a “simplified prospectus” (old CISA article 5(1)(b)). “Guidelines on Educating Investors about Structured Products,” most recently revised in 2014, have been endorsed by INMA, the Swiss Bankers Association, and the Swiss Structured Products Association.

Numerous provisions of the FinSA are triggered by an “offer to private customers” rather than a “distribution to ineligible investors.”Article 3(g) FinSA (as well as article 3(5) FinSO) defines an instrument as an offer if it contains enough information about the terms of the offer and the instrument itself. Individuals who do not match the professional-client qualifications set out in article 4(3) FinSA are referred to in article 4(2) FinSA as private consumers.

Structured products marketed to retail investors must comply with the following criteria:

Given the inclusion of structured products in the FinSA’s fundamental design, issuers must create a Key Information Document (article 58 FinSA; FinSO Annex 9). Articles received on behalf of customers as part of a portfolio management agreement are exempt from this legislation.

The goods must be backed by a regulated institution (financial services act, section 70(1); financial services act, section 96(3)). This offer is not needed to be made by customers’ portfolio managers or investment advisers (as defined in FinSO article 96(1)).

Offerings by “special-purpose entities” as defined in FinSO must be made via a regulated institution, and collateral must be guaranteed by another regulated institution (FinSA article 70(2)), if applicable.

Structured sales and offers are also considered to be a kind of financial service (see below).

Excluding funds, manager services would have two significant consequences.

Non-regulated issuers will initially find it substantially simpler to sell their product via regulated institutions such as banks, securities companies, or asset managers. In other words, unregulated issuers are encouraged to partner with regulated institutions to market their products to their customers on their behalf rather than directly to end consumers.

Additionally, portfolio managers will have relatively unrestricted access to ad hoc structured products issued by third-party issuers on behalf of their clients, as well as their own proprietary structured products. As a consequence, the FinSA’s standards for portfolio managers ensure that customers’ interests are effectively protected (see FinSA articles 6 and ff.).

Distribution and promotion

Structured products must adhere to the advertising rules for financial instruments, which begin with articles 68 and 95 of the FinSA. Article 68(2) of the FinSA demands the inclusion and proper identification of all relevant documents (see also article 68(1) of the FinSA).

In the context of FinSA article 3(c)(1), direct sales of structured products may be considered a financial service (“acquisition or disposal of financial instruments”). It is considered to encompass any action-oriented especially towards individual consumers and directed at the purchase or disposal of a financial instrument within the definition of [3(c)(1) FinSA] as per article 3(2) FinSO. Consumers may be influenced to purchase a certain financial instrument by a variety of activities, according to the FinSO of the Federal Council. Thus, we question FinSO’s article 3(2), which substantially changes the ordinance’s meaning because of FinSA 3(c)(1). Article 3(c)(1) requires that the FinSA be widely implemented. There’s no way to tell for sure, unfortunately.

If the promotion and selling of structured products were deemed a financial service under FinSA Article 3(c)(1) and FinSO Article 3(2), actors would be obliged to adhere to the FinSA Code of Conduct (Article 7 ff. FinSA) and be registered as advisers (article 28 ff. FinSA). The future will reveal if this expansive vision of financial services is maintained or narrowed.

Corporate Law

Limitation of Liability in Commercial Contracts – A Swiss Law Perspective

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Limitation of Liability in Commercial Contracts – A Swiss Law Perspective

This kind of selection of law occurs relatively often in international business transactions for a variety of reasons. Commercial contracts require contractual limitations on damages because they help parties better assess and control the business risks associated with a commercial transaction.

We will clarify how Swiss law addresses contractual limitations on damages, focusing on which liabilities cannot be excluded or limited. Each business transaction has risks for which the parties may be held accountable, such as project delays or product non-conformity.

Without an effective limitation of liability provision, there is no financial ceiling on the damages that may be collected – with the exception of statutory restrictions. It is vital, then, to ensure that business contracts include some type of restriction and that these restrictions are effective. Clauses limiting liability may take a variety of forms.

Certain provisions aim to completely exclude responsibility. For example, some restrict culpability by capping the number of damages that may be awarded, excluding certain types of losses, limiting warranties and certain remedies, or imposing short statutes of limitations on claims.

Which liability restrictions are recognized by Swiss law?

Swiss contract law is heavily predicated on the notion of contract freedom, and there is wide room for contractual responsibility restriction (including exclusion).

However, liability limits are not permissible indefinitely. Using the limitation of responsibility in terms of maximum sums (financial caps) as an example, the following statutory limits apply under Swiss law:

Any arrangement entered into in advance that purports to restrict responsibility for an illegal purpose or gross negligence is invalid (although such an agreement might be entered into retrospectively). If the restriction of responsibility occurs in connection with state-licensed commercial activity (e.g. banks), the preceding limitation of liability for mild negligence may also be invalid, at the court’s discretion.

Limitation of responsibility is not recognized in principle for death or personal harm. Additionally, limitation of responsibility is prohibited by some parts of the Swiss Code of Obligations (e.g., in connection with purchase contracts, employment contracts, and service contracts) and by certain specific legislation, such as the Swiss Product Liability Act. Contracts with consumers and general terms and conditions are subject to stricter restrictions.

What are the implications of statutory liability restrictions being exceeded?

Contractual caps on damages in excess of the statutory limits are ineffective. Unless they affect a non-essential aspect of the contract, provisions that go beyond the statutory limitations may be removed to the extent authorized by Swiss law (so-called partial ineffectiveness of severability).

To avoid providing incentives for parties to incorporate excessive restriction provisions, however, there are an increasing number of voices advocating for complete ineffectiveness, particularly with regards to consumers and general terms and conditions.

What else must be considered while designing liability limitations?

Liability limitations are never universal. Each agreement is extremely reliant on the facts relating to the parties’ connection (the parties’ roles, industry, the value of the deal, the deal’s significance, etc. ), the risks involved with the transaction (scope, probability, expenses, etc. ), and the agreement’s other provisions. As a result, it is impossible to understand or negotiate limitations of liability in isolation from other crucial agreements (such warranties, indemnity, and so on).

A party wanting to incorporate a limitation provision in a contract should thus carefully analyze the transaction at hand, read the whole contract, and examine the relevant law’s statutory limitations and the destiny of clauses that exceed those limitations.

If you would like to discuss more on this topic, please reach out!

Corporate Law

A Summary of Swiss Corporate Law Changes

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A Summary of Swiss Corporate Law Changes

General corporate law reform was adopted in June 2020. The deadline elapsed unused on 8 October 2020, however, this reform should not come into force before 1 January 2023, although some limited amendments have already come into effect, as of 1 January 2021.

We have summarized the new corporate law changes expected, to help businesses understand the new flexibilities and protection these reforms bring them.

Simplification of the incorporation rules

The complicated rules on newly incorporated companies taking over material assets of related parties have been abolished.

Share Capital and Equity Distributions

Foreign Currency- To correct some inconsistencies arising between accounting rules and Swiss corporate law, share capital may now be denominated in an approved foreign currency such as EUR, USD, GBP or JPY.

Repealed Minimum Nominal Value- To allow for enhanced flexibility in CHF share splitting, there is no longer a minimum nominal value of CHF 0.01. Shares may now be split limitlessly, as their nominal value may be anything higher than CHF 0.

“Capital Band” Introduction- Corporations now have greater flexibility for equity capital structure. Previously, a combination of a capital increase and capital reduction was not permitted. With these changes, it is now possible for a Board of Directors to increase a company’s share capital to up to 150% of their registered share capital. They may also reduce it to 50% over a period of 5 years.

Legal Reserves- For clarity, legal reserve rules have been aligned with accounting rules. The rules surrounding the formation and termination of reserves have been clarified. This includes clarifying that the distribution of capital reserves to shareholders is permitted as long as certain limits are observed.

Dividend Payments- Previously, there was some disagreement as to the payment of dividends. It has now been explicitly permitted for dividends from the profits for the current financial year to be paid.

Shareholders’ Rights

The flexibility of Meetings- Under certain conditions, electronic shareholders’ meetings (virtual such as Zoom or Skype) are now permitted.

Meetings can also now be held outside Switzerland, or at different locations at the same time. The Articles of Association must permit this, and the shareholders’ rights must be upheld and an independent voting proxy must be appointed.

Shareholders’ meetings may also be held in paper form through circular resolution.

Extraordinary Meetings- For listed companies, the threshold to convene an extraordinary meeting of shareholders is lowered from 10% to 5% of the voting rights or share capital.

Private companies retain a threshold of 10% of the voting rights, but now the threshold is also extended to 10% of the share capital, similar to listed companies.

Agenda and Motions- For listed companies, the threshold to place items on an agenda or submit motions has been lowered to 0.5%, whereas it’s been lowered to 5% for private companies.

Out-Of-Meeting Questions- Previously, questions may only be posed to the Board of Directors at shareholders’ meetings. Shareholders of private companies who hold at least 10% of shares or voting rights now have the right to ask questions of the Board outside meetings. The Board must answer these within 4 months.

Inspection of Books- To properly exercise shareholders’ rights, shareholders with at least 5% share capital or voting rights may inspect the company’s books. This is subject to the company’s confidentiality interests.

Lawsuits Regarding Repayment- The laws now simplify the process for bringing a lawsuit against shareholders, directors, and managers with regards to repayment of unduly received benefits. The outcome is now entirely separate from the financial situation of the company. Claims can now also be brought against people related to directors, shareholders, or managers.

Companies in financial distress

Debt-Restructuring Triggers- The risk of being unable to pay debts is now expressly an event requiring the Board of Directors to take action. This triggers restructuring actions they must take or propose to shareholders to ensure the company’s ability to pay their debt. They may also apply for a debt restructuring moratorium.

Notification of Insolvency- In the case of companies with concerns of insolvency, companies can put off notification of insolvency courts if enough creditors agree to the subordination of their claims. The new legislation states that there must be a reasonable prospect of restructuring within 90 days for a company to request that their creditors subordinate their claims. The latter is in line with current laws. This is assuming the deferrals do not endanger the creditors’ claims.

Elimination of Bankruptcy Deferral- The restructuring moratorium is now the only court-sanctioned restructuring procedure, as the deferral of bankruptcy is no longer allowed.

Rules About Listed Companies Only

Statutory Law- Rules on listed companies have moved from the Ordinance against Excessive Compensation to statutory law on corporations. Any changes to these have been minor, as well as the addition of standard practices as explicit law.

Gender Representation- Board of Directors and Executive Committees now have target quotas for the representation of both genders of 30% and 20% respectively. This is subject to audit.

Boards are given a transition period of 5 years, whereas Committees are given 10 years. If the targets are not met, an explanation must be given in the compensation report for the underrepresentation. Measures taken to promote gender representation and diversity in their corporate bodies must be included with this explanation.

Increased Flexibility and Protection

Once the new law enters into force, companies have two years to adapt their articles of association and regulations. This means now is the best time to act, preparing to take full advantage of the greater flexibility and protection the reform offers businesses.

Corporate Law

Switzerland’s Corporate Taxation System in 2022

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Switzerland’s Corporate Taxation System in 2022

Corporate tax in Switzerland applies to anyone running a Swiss company, whether they’re setting up businesses as limited companies, sole traders, or work as part of a partnership.
All businesses registered in Switzerland pay Swiss corporate tax, while limited tax liability is applied to businesses with a permanent presence.
What you’ll pay depends on your business structure, so it’s essential to make sure you know the rules.

Here is an overview of the Swiss corporate tax system

Swiss Taxation Levels

Resident companies are subject to cantonal/communal corporate income taxes, federal corporate income taxes, and cantonal/communal capital taxes.

Company Residence / Non-Residence

If either a company’s seat or its place of effective management is located in Switzerland, then it is considered a resident taxpayer under Swiss domestic tax laws. In general, resident companies are subject to worldwide taxation, excluding income from permanent foreign establishments or income from foreign real estate.

Swiss corporate tax may apply to non-residents if they:

• hold partnership interests in a Swiss partnership; or

• hold real estate in Switzerland; or

• have mortgage claims secured by Swiss real estate; or

• deal with Swiss real estate or act as its broker.

Taxes are imposed on non-resident companies only based on their income and assets in Switzerland. In the case of a Swiss permanent establishment of a foreign corporation, profits are calculated using the direct method, that is, from the books of the permanent establishment.

Taxes on corporate income

The federal and cantonal/community governments both collect corporate income tax. Federal corporate income tax amounts to 8.5%. However, since taxes are deductible from a company’s taxable income, the effective rate of federal corporate income taxes amounts to 7.83%. Tax rates in cantons are quite different; they average around 13%.

Taxes on capital

Capital taxes are levied on a company’s fully paid-in share capital and its reserves (net equity) at the end of each fiscal year. It varies from canton to canton; on average, it is around 0.4%. Tax privileged companies pay reduced taxes.

Participation Exempt

Dividends received by Swiss corporations and Swiss branches are deductible both at the federal and cantonal/communal levels. In that case, the corporate income tax is reduced in proportion to the net dividend income from these participations. Therefore, such dividend income is virtually tax-free.

Gains on capital

Qualified participation disposed of after one year also qualifies for the dividend received deduction on a federal, cantonal, or local level.

Privilege of holding

Moreover, all cantons grant holding companies’ privileges, which entails exemption from federal and state income tax on income from participation other than dividends. The holding company privilege generally requires:

• a statement in the company’s articles of incorporation stating that participations are the company’s sole or primary purpose; and

• at least 2/3 of assets are qualified investments; or

• Two-thirds of the income derives from eligible participation.

Due to this, pure holding companies pay federal corporate tax on only the income that is not eligible for the federal dividend received deduction.

Domestic Companies

Domiciliary companies are afforded tax privileges in all cantons. Domiciliary companies predominantly perform their activities abroad, while their administrative activities are exclusively performed in Switzerland. Tax privileges for domestic companies are available only at the cantonal/communal level, however, not the federal level.

Participation-related income is tax-free. Taxable income from foreign sources is only a small portion, depending on the importance of the administrative activities in Switzerland. The tax base determined in this manner is subject to ordinary corporate income tax rates in the canton/community. Meanwhile, Swiss source income is fully taxable. Expenditures incurred by a business are deductible from the income in which they are incurred.

Mixed/auxiliary companies

Swiss auxiliary companies may perform limited business activities. The foreign income of a business should comprise at least 80% of its total income. Thus, Swiss revenue should not exceed 20% of total revenue. In addition, 80% of the expenses must be related to overseas business activities. Tax treatment of auxiliary companies is similar to that of domestically incorporated companies, with the exception that foreign source income is included in the tax base according to the importance of the business activities conducted in Switzerland.

Losses from taxes

Losses can be carried forward for seven years for federal and cantonal/communal tax purposes but cannot be carried back.

Rules of thin capitalization

An asset base test determines whether a company is sufficiently financed under federal thin capitalization guidelines. There is a limit to the amount of debt from related parties that may be used to finance each type of asset. Federal corporate taxes do not deduct interest on related-party debt over the maximum equity-to-debt ratio.

Few cantons expressly provide for minimum equity requirements. Most cantons follow the federal guidelines for thin capitalization. Other cantons use a debt-to-equity ratio of 6:1.

Transfer Pricing

There are no transfer pricing laws in Switzerland. OECD transfer pricing methods are accepted and applied by Swiss tax authorities. A company must maintain arm’s length relationships when transacting with affiliated companies.

Stamp tax issuance

An issuance stamp tax of 1% is imposed at the federal level on both the issuance and the increase of participation rights, whether free of charge or for consideration. Amounts exceeding CHF 1,000,000.00 remain exempt from taxation. Swiss branches, however, are exempt from the issuance stamp tax.

Tax on transfer stamps

 A transfer stamp tax is imposed on the transfer of title to taxable securities for consideration when at least one of the parties to the transaction or an intermediary involved qualifies as a domestic securities dealer.

The Federal withholding tax

Federal withholding tax is imposed at the rate of 35% on profits and liquidation proceeds distributed by Swiss joint-stock companies. Company distributions are payments made to shareholders other than the repayment of capital. The Swiss branch of a foreign company does not have to withhold tax on earnings distributed to its foreign headquarters.

In Switzerland, the Savings Tax Agreement entered into force on July 1st, 2005, replacing the Parent-Subsidiary Directive and the Interest & Royalty Directive and abolishing withholding taxes on cross-border dividends and interest and royalty payments.

Value Added Tax

Vat at 7.7% is the standard rate. In general, the tax base is the consideration received by the contracting party.

Annum taxable

The federal, cantonal, and communal taxes must all be reported under one tax return for each fiscal period.

Real Estate Law

Lex Koller in Switzerland : What You Need To Know?

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Lex Koller in Switzerland : What You Need To Know?

A foreigner’s guide to purchasing property in Switzerland

Lex Koller’s legislative guide provides a brief overview of Swiss real estate acquisition.

Lex Koller – its origins

           In 1961, Switzerland introduced legislation that restricted the purchase of real estate by foreigners. The Swiss Federal Acquisition of Real Estate by Persons Abroad, or “Koller’s Law” as it is now called, states that foreigners must be specially authorized to purchase real estate in Switzerland. This law was implemented to prevent wealthy foreign investors to purchase real estate in an already scarce market. If an individual meets any of the following conditions, they are subject to prior authorization prior to purchasing real estate:

  • The purchaser is a foreign non-resident
  • The real estate incurs that authorization obligation by virtue of how it is to be used
  • The right acquired in the purchase is deemed to represent the acquisition of property within the meaning of the ARNA

What Purchases Are Subject to Lex Koller Legislation?

           The following groups are subject to Lex Koller Laws:

  • Foreigners who reside abroad
  • Foreigners who are residents of Switzerland but are not citizens of an EU or EFTA country and a lack of a valid permanent residence permit.

People under the following category are easily able to purchase real estate in Switzerland:

  • All citizens of Switzerland, including those with dual nationality, or are residents abroad
  • EU/EFTA citizens who legally reside in Switzerland
  • Citizens of other countries who hold a C permit re are actually resident of Switzerland

It should also be stated that real estate purchased through a legal entity must be controlled by residents of Switzerland, with a registered office in Switzerland.

Exceptions to Lex Koller Legislation

           There are several exceptions to Koller’s Law, allowing foreign nationals to purchase land in Switzerland. 

           Exception #1: No authorization is required if the land purchased is being used for a business or other commercial establishment. Examples of these include restaurants, doctors’ offices, or manufacturing businesses. The purchase of these properties becomes problematic if they are used for residential and commercial purposes. 

           Exception #2: Tax-paying, non-Swiss nationals may also purchase real estate in Switzerland. Under Koller’s Law, these individuals have the same status as Swiss citizens and do not require prior authorization to purchase real estate.

           Exception #3: Purchasing shares of a real estate company are not subject to Lex Koller laws.

Non-Swiss nationals cannot acquire shares in real estate companies that are not listed on a Swiss stock exchange and that own or hold residential real estate or property that is otherwise not used for business purposes.

A key factor here is the percentage of real estate held by the company that requires authorization. Residential real estate percentages of 10 to 20 percent require authorization since there is no specific threshold value.

           Exception #4: Vacation homes in certain areas of Switzerland are Lex Koller exempt. 

In Appenzell, Bern, Ausserrhoden, Freiburg, Grisons, Glarus, Jura, Neuchâtel, Lucerne, Nidwalden, St. Gallen, Obwalden, Schaffhausen, Ticino, Schwyz, Uri, Valais, and Vaud, holiday apartments do not require an authorisation (Lex Koller-exemption).

There are, however, threshold values for plot and living space measurements: The plot must not exceed 1,000 square meters and the living space must not exceed 200 square meters.

Non-Swiss nationals cannot acquire holiday apartments in Switzerland unless they meet a quota. Foreign nationals not residing in Switzerland may purchase only 1,500-holiday apartments per year, and the availability of apartments varies greatly between cantons.

Legal entities under Lex Koller

Lex Koller legislation also applies to legal entities. Thus, they must also obtain authorization before purchasing a property. Foreign legal entities must also follow the Lex Koller. They include the following categories:

  • Companies with headquarters abroad, regardless of whether Swiss nationals or foreign residents own shares.
  • Companies with a Swiss headquarters that are controlled directly or indirectly by resident persons of another country. 

A resident of another country can hold a ‘dominant position’ in an entity or business if they:

  • Control more than a third of the company capital,
  • Directly or indirectly own more than one-third of the voting rights or
  • Awarded a specific amount of loans to the company.

In this case, foreigners who wish to acquire real estate in Switzerland must also obtain approval from the relevant authorities.

In addition, the above exceptions apply here – including the fact that real estate acquired for manufacturing, manufacturing equipment, or workshop purposes is exempt from the Lex Koller Act.

In contrast, real estate acquisition to construct or lease housing in Switzerland is prohibited.

Commercial Law

A Swiss Legal Perspective on Liability Limitations in Commercial Contracts

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A Swiss Legal Perspective on Liability Limitations in Commercial Contracts

Contractual parties from different countries (for instance, a seller in Germany and UK customer) may consciously pick Swiss law as the appropriate law for their commercial transaction.

Such a choice of law arises very commonly in international business transactions for many reasons. With contractual restrictions on damages being key in commercial contracts, enabling parties to identify better and handle business risks stemming from a commercial transaction. We discuss contractual limitations on damages under Swiss law, i.e., obligations cannot be excluded or reduced.

For what reasons do commercial contracts include restrictions on the extent of a party’s liability?

Every business transaction entails risks for which the parties may be accountable, for instance, project delays or non-conformity of the supplied items. In the absence of an effective limitation of liability provision, there is no financial maximum on the damages that might be collected except for legal restrictions under statute law. It is, therefore, vital to ensure that business contracts have some restrictions and that these limits are practical.

Limitation of liability provisions may take a variety of forms. Some provisions aim to eliminate culpability completely. Others set a restriction on responsibility, for example, by limiting the amount due in damages, excluding particular categories of damages such as consequential or indirect loss, restricting warranties and specified remedies, or placing limited time limitations on claims.

Which limits of responsibility are allowed under Swiss Law?

Swiss contract law is primarily founded on the idea of freedom of contract, and there is extensive opportunity for contractual restriction (including exclusion) of liability. However, limitations of liability are not permissible without constraint.

Taking the example of the limitation of responsibility in terms of maximum amounts (financial caps), the following legislative constraints apply from a Swiss law perspective:

any agreement formed in advance and pretending to restrict responsibility for illegal intent or gross negligence is invalid (although, it would be possible to conclude such an agreement retrospectively);

if the restriction of liability occurs in connection with business operations that are legally regulated by the state (e.g., banks), the preceding limitation of responsibility for mild negligence may, at the court’s discretion, also be invalid;

in theory, limitation of responsibility is not recognized for death or personal harm;

Additionally, limitation of responsibility is not possible under some parts of the Swiss Code of Obligations (e.g., relating purchase contracts, employment contracts, and service contracts) or certain specific regulations such as the Swiss Product Liability Act.

Restrictions on consumer contracts or general terms and conditions are more limited than those on commercial contracts.

What are the effects of restrictions of liability beyond the statutory limits?

Contractual restrictions on damages that exceed the statutory limits are not valid. From a Swiss legal viewpoint, provisions exceeding the statutory limitations may be reduced to allowable. The clause in issue affects a portion of the contract that is not important to the entire contract (so-called partial ineffectiveness of severability). However, intending to prevent incentives for parties to add excessive restriction provisions, more and more voices call for complete ineffectiveness, particularly involving consumers and general terms and conditions.

What else must be taken into consideration while establishing limits of liability?

Limitations of liability are seldom one-size-fits-all. Each agreement is highly reliant on the facts of the parties’ connection (the parties’ roles, industry, the value of the deal, significance of the deal, etc.), the risks connected with the transaction (scope, probability, expenses, etc.) as well as the other provisions in the agreement. Limitations of liability typically intersect with other critical terms (e.g., warranties, indemnity, etc.) and cannot be understood or negotiated in isolation.

A party wanting to incorporate a limitation clause in a contract should thus carefully assess the transaction at hand, study the entire contract and verify the statutory limitations and destiny of provisions exceeding the statutory limits under the relevant legislation.

Corporate Law

Establishing an SA in Switzerland in 2022: Corporate Law Requirements

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Establishing an SA in Switzerland in 2022: Corporate Law Requirements

Limited companies may be formed by one or more natural or legal persons (Articles 620-763 of the Swiss Code of Obligations). The shareholders contribute a certain amount of capital divided into fractional shares. 

The SA (Société Anonyme), also known as an “AG” or “PLC”, is one of the most common legal forms in Switzerland as they offer many benefits to small businesses in terms of liability, capital regulation, etc. A limited company is liable only for its assets; therefore, the shareholders do not lose their capital in the event of bankruptcy.

Shareholders’ agreements clarify the situation when there are multiple stakeholders in a company. The minimum number of shareholders is one when establishing an SA. The company may be a natural person or a legal entity. 

A limited company is formed by registering the company in the trade register, having the establishment notarized, approving the articles of association, appointing the board of directors, and getting a verification certificate from the supervisory body.

As long as the company name is not already in use by another company, it may be chosen freely however, the suffix “SA” must be included.

A double taxation system 

When it comes to SAs, the tax authorities differentiate between commercial and private taxpayers. As with any other person, the SA is a legal entity and is taxed separately. If a company makes a profit, it must pay corporate income tax. Once it pays its shareholders dividends from these earnings, the shareholders must declare these dividends as income. Double taxation occurs in this situation.

Similarly, the company’s share capital is taxed twice: the company pays tax on it, and the shareholder declares it as personal property.

Due to the second corporate tax reform, double taxation has been reduced to a lesser extent.

Capitalization of shares

(Art. 621-622, Swiss Code of Obligations) The minimum capital requirement for the company is CHF 100,000. At least 20% must be paid up (discharged), but at a minimum of CHF 50,000 (Article 632 Swiss Code of Obligations). Share capital does not necessarily have to be paid in cash. Benefits in kind can be provided in the form of real estate, machines, etc.

A bank account must be opened by the founders of the limited company when the company is formed. The capital of the company being formed should be deposited into this account while the company is being registered with the trade register. The money is paid into a deposit account, where it remains frozen until the trade register reflects that the company was created. An applicant who wants to open a deposit account with a bank must submit a certified copy of his or her identification or a certified signature.

Following the company’s creation, the funds are transferred to the company’s current account, and the deposit account is closed. 

The company’s share capital can be invested freely by multiple shareholders. It can be in the form of bearer or registered shares, which must have a nominal value of at least one cent.

Since 1 July 2015, holders of bearer shares (or participation certificates) are required to register within one month. Furthermore, if the amount of their investment amounts to more than one quarter of the company’s shares or votes, they must state who the beneficial owner of the investment is. 

Organizations’ administrative and management bodies must keep an up-to-date list of bearer shareholders and beneficial owners.

Owners of registered shares are named on the share itself. Also, the person must be on the share register of the company. Shares registered with a company become the property of the buyer upon endorsement by the seller and registration in the share register.

By issuing shares with extended voting rights, the founders also have the power to influence the SA. A founder’s share is a share with a lower nominal value but full voting rights. As a result, a shareholder holding 1,000 shares with a nominal value of CHF 10 may have more voting rights than 100 shareholders holding shares worth CHF 100 each, even though both of them have received the same amount.  

Members of the Board of Directors

As a representative of the company, the Board of Directors acts on behalf of the company. Each member of the Board of Directors represents the company unless otherwise specified in the articles of association or the regulations.

However, one or more of the Board’s members (officers) or third parties (directors) may be assigned representation powers. 

The SA is primarily managed and governed by the Board of Directors. Under the Swiss Code of Obligations, the Board of Directors manages the company itself or delegates its management to a third party (as is typically the case). Nevertheless, the Swiss Code of Obligations establishes seven primary obligations that the Board of Directors may not subcontract or transfer (Article 716a).

In the trade register, you can find the names of the members of the Board of Directors. In the case of damages caused by negligence or intentional dereliction of duty, they are personally liable.

In recent years, corporate governance has become increasingly important, even for SMEs. In this case, it refers to how a company is managed – or should be managed.

Report of management and statutory auditor

The statutory auditor of a limited company must be appointed when it is incorporated. A report on the management of the company must be submitted every year to the Board of Directors.

Public limited companies are required to submit an annual management report, which includes the annual report and financial statements. Each annual financial statement comprises an income statement, a balance sheet, and accounting notes that have been prepared according to the Swiss legislation. These documents must reflect the company’s assets and earnings, valued as accurately as possible.

Meeting of the General Assembly

An SA’s primary body is the Annual General Meeting of Shareholders. In addition to determining the articles of association, the General Meeting elects the Board of Directors and the statutory auditor, approves or rejects the annual report, and determines how the company earnings are used. The Board of Directors must convene the General Meeting immediately in the event of a loss on the balance sheet. In case of insolvency, the Board of Directors – or the statutory auditor – must notify the court.